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Law and ethics - Essay Example

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Summary
In the case of crises that were financial during the period of 2008, the institution that failed to operate in an effective manner was the rating agencies that have the responsibility of verifying the legitimacy and effectiveness of financial products being offered in the…
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Law and ethics
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Summary Summary Introduction During 2009, John C. Coffee wrote an article d “What Went Wrong? An Initial Inquiry into the Causes Of The 2008 Financial Crises” (COFFEE, 2009, p.1).
In this article he focused on the several reasons due to which the financial crises of 2008 occurred in the region of United States and then impacted the entire world.
He established that there are three reasons that caused the financial crises of 2008. These causes include:
Failure of the gatekeepers (rating agencies) who are there to help investors in making investment decisions.
Management failure, they gave preference to self interest over the interest of the investors.
Failure of the (SEC) Securities and Exchange Commission and the changes in policies they made to help the financial sector.
Body
Failure of the Gatekeepers
Coffee states that one of the reasons due to which a financial bubble comes to an end is when the investors realize that institutions have failed to perform their jobs.
In the case of crises that were financial during the period of 2008, the institution that failed to operate in an effective manner was the rating agencies that have the responsibility of verifying the legitimacy and effectiveness of financial products being offered in the financial sector.
In 2008, the gatekeepers provided misleading information regarding the ratings of financial products and when the financial products could not live up to their ratings, the investors realized and started offloading their investments. Due to this a panic was caused and a freefall of the prices of the investment products could not be stopped.
Management Failure
Management failures have occurred in the past due to which policy makers were promoted to create the Sarbanes-Oxley Act. Managers are involved in the act of providing misleading (overly positive) information regarding their organization.
They do so because this results in increased investments and increased investments lead to increased salaries and benefits for the managers.
Similar kind of activities took place before the crises of 2008 and when the real valuation of the financial products were realized, the offloading of investments took place and odds turned against the managers.
Failure of Regulatory Agencies
Before the crises of 2008, the SEC altered its policies during the period of 2004 and removed the ceiling set on the amount of money that financial institutions including banks could use.
Due to this change in policy, several banks increased the amount of their investments and provided huge amount of loans and the end result was that some of the major banks of US lost all their liquidity and were on the verge of going bankrupt.
Conclusion
John C. Coffee asserts that there are three main causes of the crises of 2008, these include: Failure of gatekeepers which in this case is the rating agencies, managerial failures which in this case is that the mangers gave precedence to their own interest over the interest of their investors and lastly because the regulations were relaxed by the Securities and Exchange Commission.
References
COFFEE, J. C. (2009). What Went Wrong?: An Initial Inquiry into the Causes of the 2008 Financial Crisis. Journal of Corporate Law Studies, The. 9, 1-22. Read More
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